Gold with a Coupon…They’re not making more of it By Perry Vieth, Ceres Partners | MicroCap Review

From PRINT EDITION MicroCap Review Fall 2017

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Thursday, January 25, 2018

By Perry Vieth, Ceres Partners

Clichés perhaps, but they ring true for Farmland. Sophisticated investors hold farmland for a variety of reasons: as a bond alternative; as an inflation hedge; and as a truly uncorrelated asset that has held up through major drawdowns in the broader markets.

Farmland is a unique financial asset, providing equity-like returns with bond-like volatility. Since its inception in 1990, the NCREIF Commodity Cropland Index has reported average annual returns of 10.7% with standard deviation of just 5.2%, and in 26 years has never had a negative year. Farmland historically has derived 4%-5% of its total return from income and 6%-8% from appreciation.

It is important to note that when we speak of Farmland, we are specifically talking about U.S. row crop farmland which grows primarily corn, soybeans and wheat used in livestock and poultry feed. These are commodities for which global demand is growing nearly two times faster than productivity, but for which it is difficult and expensive to add new capacity (acreage). The result in most years is tight supplies and high prices. Row crops are distinct from (but often conflated with) permanent crops (almonds, vineyards, orchards) which have much greater volatility and include a host of different risks associated with owning a biological asset (trees and vines) vs. owning dirt.

Why Farmland Now?

First, many investors are increasingly worried about the next recession and about valuations in the equity market. Faced with the prospect of a bear market in equities, farmland has proven highly effective providing diversification during major drawdowns in the broader market. Farmland returns are driven by factors (crop prices, increased animal protein consumption in developing world, etc.) which do not affect other asset classes. In the last recession, when the S&P lost 46% from Q3 2007 to Q1 2009 and virtually all other asset classes drew down, Farmland gained 18%.

Second, interest rates are rising and the Fed is expected to continue to raise rates for the next 12-18 months at least. Farmland is an income generating asset but it does not trade on yield like commercial real estate or other institutionally held real assets. We estimate institutional investors comprise less than 5% of the purchases in the market. The other 95% of the market is farmers, and farmers don’t trade farms on yield as investors do. Farmers trade farms based on the economics of growing crops, and the bullish impact of $5 corn would overwhelm any bearish impact of 5% treasuries.

Finally, and perhaps most compelling, in the face of high equities valuations and rising interest rates putting pressure on asset values, farmland is at the bottom of its cycle and is poised for recovery.

Perry Vieth devotes his entire time towards managing the properties of Ceres Farms including financial, legal, accounting, hedging and investor relations. Formerly he served for ten years as CIO of Fixed Income & Currency at PanAgora Asset Management in Boston, where he was responsible for research, investment strategy and oversight of assets exceeding $7 billion. At PanAgora, Perry led several successful long-short hedge fund strategies and in 2007 was Pensions & Investments top-performing fixed income manager with a return of 16.1%. Perry also served as a portfolio manager at Fleet Investment advisors, Fuji Securities and Chicago Research & Trading Group where he began his trading career at the Chicago Mercantile Exchange in 1986. From 1982 to 1986, Perry practiced law in Chicago specializing in securities and corporate law.

He is a Chartered Financial Analyst and member of the Boston Securities Analyst Society. Perry serves on the University of Notre Dame Law School’s Advisory Council and several charitable organizations’ Board of Directors.

Perry graduated from the University of Notre Dame Law School with a J.D. and obtained a B.S. in accounting from Marquette University.

The company paid consideration to SNN or its affiliates for this article.